Companies & Industries

The Issue: When a CEO's Sacrifice Isn't Enough

January 14, 2008

When September 11 followed the dot-com bust, hotelier Chip Conley had to manage his way through a serious downturn in his business. Here are the tough choices he made

In 2000, Chip Conley was still at the top of his game. Over the last 15 years, the San Francisco hotelier had built up his company, Joie de Vivre Hospitality, into the third-largest boutique hotel chain in the country. He had 20 unique properties packed to the rafters with free-spending venture capitalists and dot-com entrepreneurs dotting the Bay Area. Early the next year, he published a book, complete with a forward written by Virgin Group impresario Richard Branson, earning him a splashy story in USA Today and a spot on the newspaper's list of "People to Watch in 2001."

By April, however, Conley's outlook was changing rapidly. A year after the Nasdaq stock market first tumbled, Conley could see Silicon Valley startups going belly-up and stronger companies cutting back on travel. Because his hotels were all in the Bay Area—his strategy had long been to grow brand awareness locally because of the wide diversity in styles of his boutique properties—he was especially exposed. "I could see my business was starting to crumble," says Conley. "Suddenly the idea of that geographic focus started to look stupid."

Once he began seeing double-digit drops in revenues, Conley knew he had to do something drastic. So quietly, without any fanfare, he stopped taking a salary. He told his controller and his president, and he looked forward to business returning to normal.

That, of course, didn't happen. After September 11, things went from bad to worse. Conley's hotels were hit not only by the Bay Area tech crunch, but of course, by the practical shutdown of the world's travel industry that followed. San Francisco, long dependent on international travelers from both Europe and Asia, fell victim to one of the worst revenue drops in decades.

Conley quickly realized his salary sacrifice wouldn't be enough. His board and investors—40% of Joie de Vivre hotels were owned with partners, and 60% managed for others—urged him hard to cut headcount. Another pressured Conley by reminding him "this is the time when you have to reduce your variable costs."

But Conley was loath to make layoffs. "If you're interested in selling next year, yes, [we should] do that," Conley told his investors. "But if you want to hold the property, cutting back by 20%…is going to hurt you three or four years from now." As a boutique chain with stylish properties as varied as a Napa Valley Tudor-style cottage and a Silicon Valley Mediterranean villa, Joie de Vivre was known for its unique customer experience and gracious, service-minded employees. That, Conley believed, was the byproduct of the corporate culture he'd worked for years to develop. Known for its cushy benefits—Joie de Vivre offered sabbaticals for salaried employees every three years and English classes for its largely immigrant back-of-the-house hotel staff—the company had very low turnover. Its loyal workforce was its competitive advantage. Cutting costs and laying people off "would gut our culture," Conley knew.

With this in mind, he approached his team of 15 senior executives soon after September 11. He revealed for the first time that he hadn't been taking a salary, but that much more had to be done to shave costs. Conley suggested the cuts should come from the top, rather than the bottom, proposing a 10% salary cut for the senior executives and a pay freeze for all salaried employees.

Most of all, he knew his directors and investors were urging him to cull his bottom, more interchangeable, ranks. He worried he might lose someone from his senior team who decided to jump ship after the pay cut was made. "For the employees who actually took pay cuts or pay freezes, I knew it would be hard," recalls Conley.

But those concerns were assuaged when Conley broached the idea to his staff. In the aftermath of September 11, sacrifice wasn't a hard concept to sell. A few raised worries—one expressed privately that he worried about paying for his son's tuition, and several wanted to know how long it would last—but most were supportive," Conley says. "They realized how serious it was," Conley's suspension of his own salary went a long way to convince the others. "They were of the mindset 'let's get in this together,' " he says.

The next two and a half years were wrenching for Conley and his team, with each summer worse than the one before. Even when San Francisco began to recover in 2004, the Silicon Valley properties had their worst season ever. A few Joie de Vivre employees left through natural attrition, and some front-line workers didn't get as many shifts. In addition, Conley and his investors ponied up extra cash 22 times over the next few years to keep the hotels open and to meet payroll. Conley himself took out a second mortgage on his home and cashed out his retirement plans to help infuse cash into the business.

While a tough call, and not a popular one at first with his investors, Conley feels his decision was the right one. He kept the senior team intact—not a single senior manager left—and had to make virtually no layoffs, he says. Today, Joie de Vivre has annual revenues of more than $200 million, triple what they were in 2001. And the company has expanded its number of properties—including some in Southern California—from 20 in 2001 to 38 today.

Best of all, Conley believes, the culture he'd built wasn't poisoned by dread, anxiety, and alarm. "Companies have natural fear ripples," he says. "In really rough times, they get to be big tsunamis. One person's fear and dissatisfaction and discomfort becomes palpable to the person next to them, and then it just reverberates." The experience, and what it taught him, even helped inspire him to write another book, Peak: How Great Companies Get Their Mojo from Maslow. Says Conley: "Employees need to feel like their survival needs are being well cared for."

This is a leader's chance to show what he's made of. Define your challenges and your core values before you make these crucial decisions

Managing through a downturn is one of the most difficult things for a leader to do. That's especially so when it's a company built on employee loyalty and customer service. There's more at stake when it comes to damaging corporate culture, the customer experience, and the long-term health of the way the company's brand is perceived as an employer.

Downturns can be a really defining moment not only for the company, but for the founder or CEO who has built the company and its culture into what it is. Leaders in this situation should consider several factors before taking action. First, they should ask themselves if the problem is industrywide. If so, it helps to frame what kind of retention issues you face. If the downturn is affecting your peers, too, there's likely less of a risk that you'll lose employees to competitors if you have to make cuts.

The second thing to consider is that whatever you do, you have to protect your competitive advantage. That has to be front and center. If you're a hotel company whose advantage is its boutique-style, intimate customer service, that's something you have to protect. When business picks back up, you can't have lost that advantage.

Next, the CEO should articulate how bad the problem is and why he or she is making a sacrifice. By doing that, as Conley did, and by making it public, your credibility jumps enormously. If a CEO says, "We're going to have to suffer, and I've already taken this cut," it makes the other cuts much easier to make.

Finally, leaders have to decide between reducing headcount and reducing the cost of employing each person. This is an especially hard decision if the company is based on long-term employment. (In a culture built around short-term, contract employees, this is less of an issue.) Whatever you do, keep in mind that your actions will drive your brand as an employer, and that will be critical for restaffing when the downturn is over. It's important to protect your brand for your customers, but you have to protect it for employees, too.